Verlin sells a commercial building and receives $50,000 in cash and a note for $
ID: 2487059 • Letter: V
Question
Verlin sells a commercial building and receives $50,000 in cash and a note for $50,000 at 10% interest. Verlins adjusted basis in the building on the date of sales $40,000 and he collects only the $50,000 down payment in the year of sale.
If verlin elects to recognize the total gain on the property in the year of sale, calculate the taxable gain.
If Verlin uses the installment method, calculate the taxable gain he must report for the year of the sale.
If Verlin collects $10,000 (not including interest) of the note principal in the year following the year of the sale, calculate the amount of income recognized under the installment sale method.
Explanation / Answer
TAXABLE GAIN ON SALE OF BUILDING:
IF VERLINS ELECTS TO RECOGNIZE THE TOTAL GAIN ON THE PROPERTY IN THE YEAR OF SALE, HIS TAXABLE GAIN IS AS FOLLOWS:
SALLING PRICE OF BUILDING ($50,000 CASH + $50,000 NOTE) $100,000
lESS: ADJUSTED BASIS OF BUILDING 40,000
GAIN REALISED 60,000
IN FUTURE, IF HE RECEIVE ANY PRINCIPAL AMOUNT, THAT SHOUDL NOT BE INCLUDED IN INCOME OF THAT YEAR
ANY INTEREST RECEIVED IN FUTURE, THAT WILL BE INCLUDED IN INCOME AS AN ORDINACY INCOME
THE YEAR IN WHICH HE RECEIVED THE PAYMENT ON THE NOTE, IN THAT YEAR THE PRORATA AMOUNT OF GAIN WILL BE RECOGNISED AS TAXABLE GAIN. HERE $10,000 COLLECTED IN THE NEXT YEAR, SO 60% OF $`10,000 WILL BE THE TAXABLE GAIN FOR NEXT YEAR. THIS YEAR NO GIAN WILL BE RECOGNISED ON $10,000
NOTE: IN THIS CONTRACT,GROSS PROFIT RATE TO THE VERLIN ON THE SALE OF BUILDING IS AS FOLLOWS:
GROSS PROFIT = SALE PRICE - COST OF BUILDING/SALE PRICE OF BUILDING
= 100,000 - 40,000/100,000 = 60%
WHENEVER, INSTALMENT AMOUNT RECEIVED 60% OF THAT INSTALMENT AMOUNT WILL BE TREATED AS TAXABLE GAIN, INTERST AMOUNT WILL BE TREATED AS AN ORDINARY INCOME
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